Monday, November 03, 2008

[Mike] Wood is the [Sacramento police] department's lead investigator of real estate fraud, a position created three years ago and partly funded by a county grant to deal with an influx of financial crimes that came with the boom in the real estate market. He is one of only a handful of real estate fraud detectives in Sacramento County.

With the economic downturn, new forms of fraud, scams and schemes in the real estate world have emerged, keeping Wood busy. As more homes go to foreclosure, for example, "professional squatters" move into vacated bank-owned homes, pretend to lease out the properties and abscond with renters' deposits.

Already struggling, Sacramento's commercial real estate market is getting hammered by a fresh wave of retailer bankruptcies, including Mervyns, Linens 'n Things and Shoe Pavilion...Garrick Brown, research director at commercial broker Colliers International's Sacramento division, said the vacancy rate in the region's major shopping centers rose to 8.8 percent in the third quarter, up from 7.6 percent in the second quarter. It was 6.7 percent in the first quarter. By the first quarter of 2009, when Mervyns closures and others take effect, the vacancy rate will top 10 percent, he said...."Mervyns' demise quickens the shakeout in the Sacramento retail property market and, in the short term, creates a little panic for landlords and tenants," said Heath Kastner, a vice president with commercial broker CB Richard Ellis. "The Sacramento area right now is in a tough spot for retail. A lot more people are closing their doors compared to new businesses opening."

The meltdown finally finished off the Melting Pot in Rocklin. The 3-year-old fondue restaurant on Lonetree Boulevard in Rocklin opens at 4 p.m. today for the last time after more than a year of fighting declining sales and dwindling crowds. "I've done everything I could. I've looked at all the options," owner Mike Frampton said earlier this week. "But the last two months were just too much." His restaurant's demise is a window into how recent wild swings on Wall Street and the credit crunch have pinched retailers and restaurants: Nervous customers spend less. Nervous banks lend less....[Frampton] open[ed] his restaurant in November 2005. The region was booming. In December of that year, the median price of an existing home peaked at about $505,000 in Rocklin's two ZIP codes, according to real estate researcher MDA DataQuick. Last month's median price: $325,000....Frampton saw much of it coming, "although I didn't realize how bad things would be – I don't think anybody did," he said.

The local Small Business Administration district and nearly 100 lenders are still making loans, but fewer people are seeking them, said Jim O’Neal, district administrator of the Sacramento SBA office. After years of breaking records for the number of loans made, the Sacramento SBA office approved only 912 loans in the year ended Sept. 30 — a decrease of 37.5 percent from the record 1,460 loans made the previous year...“It is easy to say the bankers are not lending, but the businesses are not seeking money either. Their customer base has shrunk, and they are being cautious,” O’Neal said.

For years, Inter Flora kept so busy selling its artificial plants for homebuilders’ model homes that its owners had little time to cultivate other types of customers. Then came the housing bust, and nearly the bust of the two-decades-old wholesaler. The new owner of the now-leaner Rancho Cordova company is reinventing Inter Flora and himself, and vows never to depend on homebuilders or any other single type of customer.

"We've had more transactions through September this year than I've had in the prior 10 years," said Jerry Abbott, president and co-owner of Grupe Real Estate, Stockton. "We're having a boom year, but the prices are 60 percent or less what they were at the peak of the market" several years ago...San Joaquin County's median sales price slid...41%...declining from $325,000 a year ago to $192,000 last month, TrendGraphix reported.

Last week, Wachovia Corp said borrowers with its "Pick-a-Pay" ARMs and living in or near Stockton and Merced, California, owed at least 55 percent more on their mortgages, on average, than their homes were worth.

During the first nine months of this year, Stanislaus County issued 408 new home building permits. Compare that with the 3,670 permits issued during the first nine months of 2005, according to Construction Industry Research Board statistics. That's an 89 percent decline in new home construction. "There's so few of us builders left," said [Modesto home builder Mark] Wilbur, estimating that about five locally owned companies still build subdivisions in Stanislaus County. "We're just in survival mode now. We're not going to be profitable for another couple of years or so."

Rep. Laura Richardson provided documentation Friday showing that she is up to date on the previously delinquent home loans that earned her national attention over the summer. "What I wanted to show you is everything is currently in order and has been resolved," Richardson said during a meeting with a reporter and editor at the Press-Telegram....As for the Sacramento home, she said she plans to list it for sale or rent in December.

[N]o matter how far we go in modifying, restructuring, writing down principal on loans in order to stop foreclosures, the bottom line is that most of the borrowers in trouble had no business being in the homes they bought in the first place. You can modify their loans for five years, but they will probably lose the home anyway.

Is that mean? It’s not meant to be. I just think that in order to set the market right we need to let prices fall to where they must and start over again with mortgages, buyers and homes that make sense. We’re all losing money here, but that’s because so many people took advantage of free money during the housing boom (and don’t get me started on how those who didn’t take advantage of that free money still get screwed). I understand the need to restore the credit markets and stop the crash in housing, but keeping folks in homes that are way beyond their means is just prolonging the pain of the inevitable.

Just as in the 1930s, there is no evidence that the policy makers have any understanding of what they are doing. They need to make way for the natural forces of repair. They need to let housing prices fall. They need to let firms go bankrupt. They need to let firms that are healthy thrive. They need to let healthy firms buy the sick firms. It is time to let the imprudent fail and the prudent pick up the bargains.

A recession is coming (or has already arrived) no matter what happens in Washington. The question is whether the attempt to forestall it is going to make it worse and turn it into another Great Depression. By acting without rhyme or reason, politicians have destroyed the rules of the game. There is no reason to invest, no reason to take risk, no reason to be prudent, no reason to look for buyers if your firm is failing. Everything is up in the air and as a result, the only prudent policy is to wait and see what the government will do next.